Towards the non-inclusion of the financial sector in the scope of the Corporate Sustainability Due Diligence Directive?

Background

The work of EU institutions on corporate responsibility for human rights and environmental protection is still in progress.

Several European countries have already imposed due diligence and reporting obligations on companies in an effort to prevent and remedy any adverse impact on human rights and the environment. 

France was the first State to impose mandatory human rights due diligence obligations with the enactment of the French Duty of Vigilance Law on 27 March 2017, requiring in scope companies to set up, publish and implement a "vigilance plan" aiming to identify, anticipate and human rights violations that might result from the activities of the parent company but also the activities of the group, as well as suppliers and subcontractors along the value chain. 

Other European countries have subsequently considered the adoption of legislations on expected human rights and environmental due diligence. Most recently and most significantly, Germany has joined the movement with the German Act on Corporate Due Diligence in Supply Chains of 16 July 2021 (the "SCDDA"), which entered into force on 1 January 2023 basically pioneering the due type of due diligence obligations which companies can expect under the Proposal.

Progress of the CSDDD so far

Following a consultation on corporate responsibility with regard to environment, social and human rights launched by the French Presidency of the Council of the European Union, the European Commission published, on 23 February 2022, a proposal for a Directive on Corporate Sustainability Due Diligence (the "Proposal"), aiming to introduce a harmonised human rights due diligence requirement for large companies operating in the EU.

The Council of the EU then finalised its position on the Commission’s Proposal on 30 November 2022. While the text amended some of the provisions of the Proposal, the substantive diligence obligations broadly remained the same.

On 1 June 2023, the European Parliament adopted its own version of the Proposal, which forms the basis for the current negotiations in the "trilogue" phase (i.e. discussions between the EU institutions) that began in June 2023.

Scope of application: toward the non-inclusion of the financial sector?

The Council had clarified the definition of regulated financial undertakings, leaving financial products out of the scope of the Proposal. 

The European Parliament significantly expanded the scope of application of the Proposal, voting in particular in favour of including all financial undertakings within the scope of the Proposal. The inclusion of the financial services sector could also apply to asset managers so it could give rise on an obligation to induce their investee companies to bring actual adverse impacts caused by them to an end. 

As expected, this gives rise to heated debates.

The Spanish Presidency of the EU Council is now proposing to exclude the financial sector from the Proposal, offering to include a clause for (potential) later inclusion. 

France is reportedly at the origin of this demand to exclude the financial sector from the due diligence obligations, despite the positions in support of its inclusion taken by the European Parliament, the Commission, and other Member States.

On 15 November 2023, the International Federation for Human Rights (FIDH) published recommendations for the trilogue so that the Proposal can "effectively contribute to protecting human rights and the environment", asking in particular that the Proposal "shall also include financial institutions as their activities may cause or contribute to harms". There has been a lot of debate and scrutiny placed on financial institutions regarding the financing of fossil fuel companies. The inclusion of the financial sector in the Proposal could be viewed as an extension of that debate, particularly as the Proposal requires in scope companies to (i) develop transition plans, (ii) consider adverse impacts on actual and potential human rights and the environment also with respect to value chain operations carried out by entities with which the company has a business relationship.

Next steps

EU institutions have been discussing their positions on the Proposal intensively, with the aim of concluding the legislative process by the end of 2023, i.e. before the European Parliament elections in 2024. The next few weeks will be crucial in determining the scope of the Proposal.

Until then, national legislations currently in force are already leading to enforcement actions and litigation (e.g. the French Duty of Vigilance Law and the German SCDDA). Multinational companies need to implement or update existing human rights and environment related risk management systems now and should look at the Proposal when considering the scope and extent of compliance systems. Best-practice and compliance benchmarks for the implementation of such effective risk management systems and approaches to respective governance setups can be drawn from current experience under the French Duty of Vigilance Law and German SCDDA.

Please get in touch with a member of Hogan Lovells’ Business and Human Rights group or your usual Hogan Lovells contact if you wish to discuss this development. We stand ready to assist companies from all industry sectors to assess how to assess and adjust their processes and operations and associated litigation risks in this context.

Authored by Christelle Coslin, Margaux Renard, Rita Hunter, Christian Ritz